June 13, 2018 | Inflation Is Back, Part 7: Just Check Out This Chart

John Rubino

John is author or co-author of five books, including of The Money Bubble, The Collapse of the Dollar and How to Profit From It, Clean Money: Picking Winners in the Green-Tech Boom and How to Profit from the Coming Real Estate Bust. A former Wall Street analyst and featured columnist with TheStreet.com, he currently writes for CFA Magazine.

Monthly economic readings tend to be full of noise and are therefore unreliable. So it’s best to save the excited assertions for established trends.

The US Consumer Price Index appears to have reached that point:

As most readers probably know, the CPI is widely believed to understate the true rate of inflation because of statistical tricks like hedonic adjustment and substitution. So when this index starts rising you know the real action is even more extreme.

The past 12-month increase was 2.8%, which is the highest in six years and continues a general uptrend that began in 2015. What’s moving it? Oil, which controls the price of gasoline among many other things, is up big in the past year:

The cost of renting an apartment or house is also way up, which isn’t a surprise given that home prices are now back at 2006 bubble levels:

The Fed’s Dilemma The Fed is widely expected to raise short term interest rates again this week, but after that it gets murky. With consumer, government and corporate debt, stock prices and home prices all at record-high levels – and the near-death experience of the 2008 housing/derivatives bust still reasonably fresh in economists’ minds – it’s pretty well understood that raising the cost of money beyond a certain point could lead to catastrophe. See The Number That Ends This Cycle.

On the other hand, letting inflation run beyond 3% on a sustained basis risks leading everyone to extrapolate a rapidly depreciating dollar into the indefinite future and act accordingly. Hello, crack-up boom.

This dilemma isn’t unique to this Fed, or this cycle or this country. All mismanaged economies arrive at this point eventually, where the choices narrow to just two, neither of which will prevent an epic bust.